Below are excerpts from a very interesting article from MortgageNewsDaily.com capturing New York Fed President Bill Dudley’s thoughts on the future of government purchased mortgage-backed securities.  You will also find our thoughts on how it will affect rates immediately following the article.  Please feel free to leave your comments below.

Fed President Puts Timeline on Rates Policy. Raises Doubts on Mortgage Purchase Program

On Wednesday night New York Federal Reserve Bank President Bill Dudley appeared on the PBS Nightly Business Report. 

It is important to point out that the New York Fed President has more influence than his counterparts. The New York Fed president serves as the FOMC's vice chairman and is a permanent voting member of the Federal Open Market Committee. It is also interesting to note that the NY Fed President is usually expected to keep a low profile, with that in mind, Dudley's willingness to share insight and perspective should be taken as an "out of the ordinary" event.

Dudley made several comments on the Fed’s Mortgage Backed Securities Purchase Program that need to be called to your attention. Here are a few:

1. It would "seem prudent" to pull back on the Fed's mortgage-backed securities purchase program now that the economy is starting to improve.
2. "If we were to wait and see what happens, that means we'd have to keep purchasing which would mean our balance sheet would get bigger,"
3. "So that would create anxiety on the other side. Some people are worried about the size of our balance sheet. I don't think we have an exit problem. I think that we're going to be able to manage our balance sheet down very, very smoothly."
4. "Obviously, if mortgage rates were to back up a lot and if that had a big consequence for the economy then we could very well rethink the issue about whether we wanted to buy more mortgages,"

Plain and Simple
Since Ben Bernanke first hinted at a possible extension a few more Fed officials have suggested extending mortgage-backed securities purchases beyond the March deadline. Many market watchers believe this will prevent potential setbacks in housing markets. Dudley however says it would "seem prudent" to pull back on Fed MBS purchases. Basically, by calling attention to the size of the Fed's balance sheet Dudley is telling us that if they Fed continues to hold the hand of the market, that it will be harder and harder for the Fed to exit the mortgage market. He did not totally close the door to an extension though, if mortgage rates rise to the point where loan supply is much less than forecast (which is already expected to be very low relative to this year), the Fed would need to step in and buy more mortgages.  1/14/2010 

What Does This Mean To Borrowers?  Churchill Mortgage Perspective

Once the Fed stops their mortgage purchase program, we anticipate the interest rates will quickly rise 1 to 1 ½ points, eliminating the benefit for many Americans to refinance.  When this happens, it will probably happen quickly and many will miss their savings opportunity.